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Investment company and former CEO charged with defrauding investors related to sale of index products using ETFs; firm settles by payment of US $35 million

The Securities and Exchange Commission filed charges against F‑Squared Investments, claiming it defrauded investors by falsely advertising a successful seven-year track record for its core investment strategy, reflecting actual investments for actual customers, when performance data was actually “materially inflated and hypothetical.” Simultaneously, the SEC announced a settlement with F-Squared related to these charges, pursuant to which the firm will pay US $35 million and admit to its wrongdoing. Separately, the SEC charged Howard Present, the firm’s co-founder and former chief executive officer, for also making false and misleading statements to the public about F‑Squared. This case is still pending. The SEC claimed that, from October 2008 to September 2013, F-Squared marketed an exchange-traded funds sector rotation strategy named “AlphaSector” that was based on an algorithm that determined to buy or sell nine industry ETFs. F-Squared marketed AlphaSector through an index. Today, claimed the SEC, “AlphaSector is the largest ETF strategy in the market.” In consenting to its settlement with F-Squared, the SEC noted “the remedial acts undertaken by Respondent and Respondent’s cooperation with the Commission,” including its separation from Mr. Present in 2014 and its retention of an independent compliance consultant during the same year. In addition to agreeing to pay a fine, F-Squared agreed to continue its retention of the independent consultant and to adopt its recommendations.